Poland Pins LOT Survival on Return of Boeing’s Grounded 787Richard Weiss
Polish airline LOT, surviving on state aid after five years of losses, will file a recovery plan tomorrow without knowing when the Boeing Co. 787 Dreamliner on which the strategy is built will fly again.
LOT, one of the world’s oldest airlines, tracing its roots to 1922, had been counting on a fleet of eight 787s to spur a return to profit through a 20 percent cut in operating costs. With two planes delivered, it managed a single long-haul trip before the model was ordered out of service with battery faults.
While its boarding passes still advertise Europe’s first Dreamliner flights, Warsaw-based LOT has also taken the lead in publicly demanding compensation for the global grounding. Chief Executive Officer Sebastian Mikosz must meanwhile convince the Polish government to extend its support by proposing an overhaul that could call for the 787 to make up one quarter of the fleet.
“It’s a gamble,” said Sash Tusa, an analyst at Echelon Research & Advisory LLP in London. “If the Dreamliner comes back and operates as promised it could have a transformational effect on LOT in a way it won’t for most other airlines. But pinning a recovery plan on a new model is very risky because the aerospace industry does not have a good record of delivering on time.”
LOT failed to benefit from a surge in demand for no-frills travel as thousands of Poles sought higher pay abroad after the country’s admission to the European Union in 2004, losing out to discount specialists such as Ryanair Holdings Plc.
The airline bought the 787 to target the intercontinental market, where margins are higher and it can still hope to find a viable niche. By March 3, LOT Dreamliners were due to have served Toronto, New York and Beijing, as well as Chicago; in reality there’s been a daily loss of $50,000 from the grounding, operations chief Tomasz Balcerzak has said.
State-owned carriers from the Balkans to the Baltic are battling to survive as fuel costs clip margins just as austerity programs and a European Union aid clampdown curb funding. LOT had an operating loss of 200 million zloty ($62 million) last year, even after paring its headcount by 9.8 percent and increasing the passenger total 7 percent to almost 5 million.
Mikosz, who returned to the CEO role he quit in 2010 last month, inherits a plan to deepen the workforce cuts and slim the fleet to 25 jets from more than 40, of which the 787s would form a significant chunk. The revamp would aim to win EU approval for an aid package that could total 1 billion zloty.
Haunting restructuring efforts at East European airlines is the example of Hungarian national carrier Malev Zrt., which folded 13 months ago after 66 years of operations.
Weighed down by debts of 60 billion forint ($260 million), Malev collapsed when European Commission ruled that the airline must return the equivalent of $390 million in aid supplied from 2007 to 2010, prompting the government to pull the plug.
At LOT, as Polskie Linie Lotnicze LOT SA is known, a 400 million-zloty government loan granted in December may be less than half the total financing that the company needs, Deputy Treasury Minister Pawel Tamborski said at the time.
Poland in turn faces a June 20 deadline to submit the LOT aid package to EU regulators for approval, according to Antoine Colombani, a spokesman for the European Commission.
“It’s not difficult to make a business plan look good; the challenge is to come up with a viable strategy,” said consultant Samuel Engel at ICF SH&E, who worked on LOT’s part-privatization in 1999. “You can gauge airline costs very accurately. What doesn’t work so well is the revenue estimate.”
Founded after Poland won its independence following World War I, LOT remained a vital link with the outside world during the Soviet era before embracing market economics and adding western-built aircraft after the fall of communism in 1989.
A decade of growth led Swissair Group to take a minority stake in 1999, adding LOT to its Qualiflyer alliance, only for the Zurich-based company to go bust in the wake of the Sept. 11, 2001, attacks on the U.S. after expanding beyond its means.
Following Poland’s EU entry, 49 percent of the market has been captured by short-haul discount carriers, the highest penetration among major European economies, according to the International Air Transport Association. LOT’s response has been to make the wide-body Dreamliner the focus for a turnaround plan based on retaining a sustainable long-haul network.
LOT had been working on the premise that the 787 would be out of service until October, requiring it to extend leases on three Boeing 767s. That changed when Boeing Commercial Airplanes President Ray Conner said last week that flights could restart “in weeks, not in months” after upgrades including installation of a new battery enclosure and adjustments to the charger.
The U.S. Federal Aviation Administration must still approve the fixes and Polish Treasury Minister Mikolaj Budzanowski said yesterday he’s hoping for a return by June. For the moment, the only 787 to have operated a long-haul flight for LOT remains stuck in Chicago, with the other in storage in a Warsaw hangar.
Even before the Dreamliner’s grounding on Jan. 16, the model had impacted the Polish company’s earnings as the first delivery, originally slated for October 2008, came four years late following production problems at Boeing and its suppliers.
LOT’s losses over the years amounted to 1.26 billion zloty, according the Treasury, while it went through 10 CEOs or interim chiefs in the seven years before the reappointment of Mikosz -- an average tenure of just eight months.
Cash reserves were probably “close to nothing” at the time of LOT’s government loan in December, according to ICF’s Engel.
Poland, which holds a 93 percent stake, says the longer-term aim is to sell stock to another airline or private-equity fund. LOT lost one potential buyer in June, when Turk Hava Yollari AO, or Turkish Airlines, terminated talks over EU rules that cap outside ownership of the bloc’s airlines at 49 percent.
Still, Poland’s population of 38 million, together with the 20 million ethnic Poles living abroad, may mean that LOT can avoid collapse, according to Engel, who said the carrier may follow a similar path to Austrian Airlines or the successor to Swiss, which were purchased by Deutsche Lufthansa AG.
“If they get compensation from Boeing they may be able to pull it off,” Engel said. “Long-term, the 787 still makes sense for them.”